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Title: The Stable Transformation Path

Author(s): Francisco J Buera, Joseph Kaboski, Martí Mestieri and Daniel O'Connor

Publication Date: October 2020

Keyword(s): growth, investment dynamics and Non-balanced Growth

Programme Area(s): Development Economics and Macroeconomics and Growth

Abstract: Standard dynamic models of structural transformation, without knife-edge and counterfactual parameter values, preclude balanced growth path (BGP) analysis. This paper develops a dynamic equilibrium concept for a more general class of models --- an alternative to a BGP, which we coin a Stable Transformation Path (STraP). The STraP characterizes the medium-term dynamics of the economy in a turnpike sense; it is the path toward which the economy (quickly) converges from an arbitrary initial capital stock. Calibrated simulations demonstrate that the relaxed parameter values that the STraP allows have important quantitative implications for structural transformation, investment, and growth. Indeed, analyzing the dynamics along the STraP, we show that the modern dynamic model of structural transformation makes progress over the Neoclassical growth model in matching key growth and capital accumulation patterns in cross-country data, including slow convergence.

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Bibliographic Reference

Buera, F, Kaboski, J, Mestieri, M and O'Connor, D. 2020. 'The Stable Transformation Path'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15351